â€” Often a family's fortune can be made and lost in just three generations. Challenges for preserving wealth arise when there is a lack of trust and communication within families and when heirs are ill prepared. To secure family wealth over time, planning an estate â€“ by protecting assets and preparing future heirs â€“ is as important as managing that wealth appropriately. The Edmond de Rothschild Group, which is heir to a 250-year-old family tradition and has successfully navigated seven generational transitions, has a deep understanding of these concerns. Interview with Catherine Motamedi, Head of Wealth Solutions at Edmond de Rothschild (Suisse) S.A.
In your experience, what are the main sources of difficulties for a family during a wealth transfer?
From a legal and tax perspective, four key factors can complicate any estate:
Family members may reside in different countries at the time of death of another member of the family. This often creates legal uncertainty from an administrative and tax perspective. If several countries claim to be the competent tax jurisdiction for asset transfers when an estate is being settled and there is no double-taxation agreement between these countries, taxation issues can prove extremely complex.
The deceased may have left no indication as to how assets are to be allocated among his or her heirs. This can sometimes generate major conflicts. When it is time to handle an estate, emotions can run high and make any discussion or any objective, reasoned reflection difficult or even impossible.
The deceased's estate may include non-financial assets such as property, an art collection or a company. These are often difficult to divide up.
The children of the deceased may feel that they have been treated unfairly.
During the deceased's lifetime: In many families, parents may have decided to give a great deal to one of their children, typically when he or she is more in need than the other children. This may lead to a conflict between the one who received more and the other children when it is time to settle the estate.
After death: In countries with a civil-law tradition, if the "rightful" heirs do not receive their lawful proportion of the inheritance, they may initiate legal proceedings.
What precautions can parents take to avoid these difficulties?
A number of different solutions exist: some are easy, while some are more complex. The complexity chiefly depends on the volume of assets, the number of children, the number of different countries in which family members are resident, and the location of the assets that comprise the family's wealth. The fairness of the division of wealth as perceived by the children may also create added difficulties, whether or not this is justified.
Families should start by answering a series of easy questions: did you sign a pre-nuptial agreement?
Advisors are often tempted to recommend that clients directly set up holding structures. I think that before this, families should start by answering a series of easy questions:
Did you sign a pre-nuptial agreement? A pre-nuptial agreement continues to apply to a married couple when they change countries. Without a pre-nuptial agreement, the married couple will be subject to the local statutory provisions applicable in each country, which can differ significantly.
Have you drawn up a will? What do you want to put in your will? You may need to be assisted by a notary, but our Bank often advises families on these issues upstream.
Do you want to begin making gifts during your lifetime? These could be explained to and accepted by your children, who could in turn respectively approve any gifts made to their siblings (gifts outside the scope of the estate or inheritance agreements). We are also on-hand to assist families in these matters.
Each family is unique, and the transfer of wealth is also unique. Depending on the amount of assets involved, creating a trust may help in organising an estate and managing its transfer, and even enable the transfer of wealth to be deferred in the period following the death of the trust's founder. The trust may also be a pedagogical tool that helps explain the measures taken by its founder to divide the estate among his or her future heirs. Parents can explain to their children why they have not all been treated equally and whether or not they intend to make up for what could be seen as unfair treatment when it is time to deal with the estate.
Do the only precautions to be taken concern the assets?
Strong family governance is essential â€“ with family members acting according to the same values and beliefs.
We have seen that beyond asset structuring, settling an estate is fraught with difficulties due to future heirs being ill prepared and owing to poor communication between generations as to the expectations of each family member, their role and responsibilities.
An estate is better protected when there is strong family governance, with family members acting according to the same values and beliefs, and clear communication of what is expected by each present and future generation.